81st Annual International Conference Proceedings - 1996 - Chicago, IL

The environment. The role of the Purchasing Department has changed
significantly in the last few years. Members of the Purchasing profession are
now highly involved in more value-added activities, such as cost reduction,
negotiations, supplier evaluations, cycle time improvements and the
development of alliances. In all industries today, the environment is
extremely volatile and the supplier bases are decreasing rapidly. It is now,
more than ever, that Purchasing must assure its internal customers that they
are aligning themselves with suppliers that will be there in the long run to
supply the company's requirements. A strategy that incorporates a contingency
plan, management of the supply chain and the development of best practice
buying strategies can accomplish this by reducing costs, assuring on-time
delivery, improving quality, preparing for emergencies, assuring sources of
supply, reducing inventories, and increasing standardization. The strategy
that we have developed to accomplish this is our Managed Acquisition
Procurement Plan.

In 1994 Dayton Power and Light (DP&L) was named Utility of the Year by
Electric Light and Power. While we take pride in the efficient operations
that earned us the award, we also recognize the changing market conditions and
its affect on our ability to do business in the future. We all have access to
the same customers, technologies, suppliers, labor forces, and capital markets
as our competitors. Consequently, the only way we can gain the competitive
advantage we are all seeking is to continuously improve the way in which we
execute our activities.

What is a competitive advantage? It is making timely changes in the
processes to keep improving your product or service. Competitive advantage
cannot be determined by looking at a firm as a whole. Instead, it stems from
the processes and the many discreet activities a firm performs in designing,
producing, marketing, delivering and supporting its product or service. To
improve the process, you must first analyze the activities involved to
determine which activities should be improved or eliminated. Then, even after
analyzing the activities, you still must have an idea of where you are headed.
It has been said, "If you don't know where you are going, any road will get
you there." That's why at DP&L we developed a strategic plan, or a map
(M.A.P.P.)to help guide us, so that we get to where we want to go.

The need. At DP&L, we are ready for the changes that are occurring, we
are not satisfied with status quo conditions. Therefore, the development of a
strategic procurement plan was designed to keep us ahead of those that are not
prepared to change. We believe if you are not ready to change, then you
should be prepared to step aside or be run over by those changing around you.
Our plan is designed to help us increase our knowledge of suppliers, identify
our critical needs, and the rapidly changing markets in which we deal. We
also want to maximize our customer service level while minimizing risk to the
company. With our M.A.P.P. program, we are identifying, and continually
improving processes and identifying the most effective methods of acquiring
goods and/or services in the right quantity, at the right price, at the right
time, and from the right source.

According to Webster, strategy is defined as "the operations or movements
previous to a battle, positioning oneself for an advantage." Doesn't that
sound familiar? Today, we are all facing a need in our respective industries
to position ourselves for a competitive advantage. One way to accomplish this
is to optimize the supply chain. To do this, Purchasing will play a critical
role in that its task will be to manage its external resources more
effectively. For this reason, our Managed Acquisition Procurement Plan
(M.A.P.P.) was developed to provide a tool to aid us in managing new
information about markets and assist us in providing viable procurement
options to management and the end users.

The Goals. The goals of the M.A.P.P. program are as follows:

Improve delivery performance

Improve product quality

Be prepared for emergencies

Be prepared for changing markets

Assure source of supply

Reduce supplier base

Focus on value added activities

Reduce inventory

Increase inventory turns

Improve supplier relationships

Increase standardization

Manage the Supply Chain

Work smarter - implement "Best Practices"

The Plan. The Managed Acquisition Procurement Plan (M.A.P.P.) is made up
of three phases.

A Contingency Buying Plan Phase: The Contingency Buying Plan is
designed to identify all critical items in an effort to be prepared for
an emergency situation such as strike, weather related catastrophe, or a
shrinking supply market.

Supply Chain Management Phase: Supply Chain Management is aimed at
improving the management of the links in the chain by examining the
supply chain and looking for opportunities for improvement. Also, as
part of the supply chain management, suppliers are assigned a rating as
part of a supplier qualification process. This process measures
supplier performance statistics, supplier technology improvements, and
requires continuous process improvements by the suppliers to become
qualified and remain qualified to do business with DP&L.

"Best Practices" Buying Strategy Phase: This "Best Practices" phase
examines all aspects of the purchasing process and establishes "Best
Practice" guidelines for the most effective procurement of goods and
services.

Supplier Profile. We acknowledged that to remain competitive in this
changing marketplace we must align ourselves with suppliers that share our
business philosophy and will be here to service us in the long run. We must
develop mutually beneficial relationships with suppliers that are willing to
share information and resources and work together for the good of both
companies.

To reach the "destination" that we want our M.A.P.P. to take us, we
believe, it is also necessary for us to acquire more detailed information from
our suppliers.

To acquire this information, we issued very detailed supplier profile
questionnaires to our key suppliers and asked for specific information
regarding factors such as organization and history, materials management,
current technology, inventory control, facilities and equipment, financial
data, delivery and scheduling, supply management, and overall quality. The
profiles were evaluated and used to assist in the strategic planning process.

In addition to providing the information on the supplier profile, we
asked our suppliers to document any process improvements or cost savings ideas
that they have developed. In an effort to foster an environment of continuous
improvement, it is important to recognize those suppliers that are making an
extra effort to continuously improve. These documented suggestions are
considered "Points of Interest", similar to an area highlighted on a road map
that indicates a site worth stopping and observing. These extra "points of
interest" help each supplier reach higher levels in the supplier qualification
process.

The combined efforts of DP&L and its suppliers are expected to
continually improve quality awareness, expose various cost savings options,
and develop more productive and beneficial long term relationships.

Contingency Buying Plan. Our strategy is to develop an emergency plan of
action for any foreseeable situations which may jeopardize the supply of this
critical item/service following these steps:

Develop a list of the items and or services that you consider critical
to your operation and that you will be focusing on.

Using the information from the supplier profiles, review the following
checklist to help identify potential emergency situations.

Is this item/service sole sourced?

Are there a limited number of suppliers for this item/service?

Are any of these suppliers likely to be sold, traded, or merge with
another company? Are financial conditions favorable for a sale? Does
their product not fit in with the goals of their parent company? Have
they not been performing in the market?

Are there any potential work stoppages from these suppliers or their
raw material suppliers? (Union contract dates, reliance on one raw
materials supplier, foreign suppliers with risk of political unrest,
etc.).

Does the location of any of these suppliers cause potential delivery
concerns because of weather?

Are the suppliers of this item/service geographically spread out or
could all suppliers be affected by the same weather problem?

Do you have any reason to believe that any of these suppliers will not
be providing this item/service in the long range? (Rumors of exiting
the market or other future plans? Are they investing heavily in this
item/service or others?)

Are we a major customer to any of these suppliers? Do they rely on
our business? Would we, or would another customer receive preferential
treatment?

Have any of these suppliers had any lawsuits, EPA or OSHA violations
in the past few years?

Are all suppliers financially stable?

Now, for each potential emergency situation, develop a contingency plan,
utilizing the following sample list of questions.

If there appears to be a possible shortage of supply or of suppliers (sole
sourced, limited number of suppliers, long term shortage of suppliers):

Can you locate another supplier?

Is there an alternate product or service that could be used in an
emergency?

Are there other companies that you could contact for help?

Should you be establishing an alliance or some way to assure your
supply from this sole source?

Should you try to support multiple suppliers to help more suppliers
stay in business?

If there appears to be a possible work stoppage (at the manufacturer or from
the raw material supplier):

Make sure that you have a list of all contract dates and are
monitoring the progress of contract talks.

What other alternatives exist should a work stoppage occur?

What plan does the manufacturer have in the event of a work stoppage?

How will they guarantee your supply?

If there appears to be a possible weather related problem (high risk area,
difficult access, or all suppliers centrally located):

Are there alternate sources available?

Should you have emergency stock in a different location?

Do you have alternate transportation in case of an emergency?

What type of emergency plan does the supplier have for weather related
emergencies?

If there have been any lawsuits, EPA violations or OSHA violations in the past
three years:

Are you sure that you have communicated your terms and conditions?

Are these suppliers up to date with current liability insurance and
drug testing compliance?

Are there potential liability issues with your company that should be
addressed with the legal or environmental departments?

Do you have a plan in case of an environmental problem or accident?

The contingency buying plan that you have developed should be used as a tool
to assist you in handling any situations that should arise and also as a
method to help prevent and foreseeable emergency situation.

Supply Chain Management. Following these step can provide a good
starting point for improving supply chain management - but keep in mind that
no standard formula for improving supply chain management exists - successful
supply chain management is implementing the philosophy tailored to the needs
and requirements of the particular situation. Rather than looking only at the
functioning of its own organization, a Supply Chain Management approach looks
up the supply chain toward suppliers and down the supply chain toward
customers, to try to optimize the entire system.

Identify all members of the supply chain from the raw material supplier
to the end user.

Identify the carriers involved at each level of the chain.

Identify the processes of each part of the chain:

How are orders placed?

Who determines requirements?

Who communicates orders to factories?

Are they sent via EDI?

Once order is placed with vendor:

What steps are taken?

What paperwork is involved?

What approvals are required?

Determine which processes are weak or add no value.

Are test reports sent that are unnecessary?

Are people involved who don't need to be?

Is there any reason to bid this each time?

Are there any extended time delays at any point in the chain?

Identify ways that you can improve the processes involved in this chain
by eliminating activities which add no value, improving communications
and the sharing of information, and reducing cycle times.

Can the requisition be sent for automatic order entry?

Can you have the supplier involved from the beginning to help define
your requirements?

Are the distributors adding value?

Can you combine quantities to have truckload shipments?

Can you buy a more standard product?

Can you eliminate approvals?

Can you eliminate any of the paperwork involved?

Is there good communication between each level?

Is the end user satisfied with the product?

Would bar coding be helpful?

Should you set up meetings between the end user and the supplier (both
Tier - One and Tier Two? etc.).

Identify opportunities for strategic alliances to be established by
using the following guidelines:

Does the Item or Service have

High annual purchase cost?

High demand on a regular basis?

Emergency or critical use?

Extended lead times that may be improved.

Is the supplier

Financially stable?

Recognized for integrity?

Competently managed?

A market leader?

Customer service oriented?

Competitively priced?

Innovative?

Flexible?

Technologically advanced?

Investing in R&D?

Willing to promote the exchange of ideas?

Capable of offering means of improvement in areas such as cost
reduction, safety, and reliability not offered by their competitors?

Will the relationship

fit into the Company's overall strategy?

provide benefits that will be worth the effort required to make the
endeavor successful?

allow for common goals and a shared vision to be established?

provide additional legal or economic liabilities?

Some of the improvements offered by an effective Supply Chain Management
plan are:

Information sharing as required for planning and monitoring processes.

"Best Practices" Buying Strategy. The plan is to develop a documented history
of buying practices and trends for each item/service and identify
opportunities to improve current buying practices.

1. First you must assess your current situation and identify your current
practices by answering questions such as the following:

How many items are in the material class?

Which items are on agreement? How many? Identify current agreements
(length, value,etc.).

Which items are single/sole source items?

Identify all members of the supply chain

Who are the end users?

What are the current inventory levels? (maximum, minimum, and order point)

Are there items stocked with the supplier? Stocked where? With whom? Why?

What is the current turnover ratio?

What is the current product lead time? (typical, emergency, trends)

What is the raw material lead time? (typical, emergency, trends)

What is the price history? (Volatility, trends, competition, etc.)

What is the supply history? (Volatility, trends, stockouts, etc.)

What is the best time of year to buy/bid?

What is the appropriate agreement length?

What is the Product/Industry history?

(Trends, suppliers entering/exiting, shortages, strikes)

What are the possible threats?

Are there alternate suppliers?

Are there alternate products?

2. To develop your buying strategy, you must put together a team of people to
develop your own "Best Practices" Buying Strategy. On this cross-functional
team you might want to include members of engineering, the end users,
inventory control, computer services, and possibly representatives from your
suppliers? Get your team together and working as a group, brainstorm on ways
to improve your current process. Utilize the following checklist as a
guideline to get started:

Can we reduce inventory levels? What are the consequences?

Can we reduce the number of items that are held in inventory? (Too many
sizes stocked? Slow movers?)

Do we need emergency stock? Why? Where should it be held? How many should
be held?

How is the material transported? Are there potential environmental or
liability problems? How can this process be improved?

Are there alternative products/suppliers? (What? Who? How many?)

What are the critical raw materials and/or components of this product? What
are the trends (supply, price, etc.) of those markets? How can we reduce lead
time and assure supply of this critical part?

Can we standardize? What are the consequences?

Can we schedule automatic deliveries/releases? What would be the impact?

Can we reduce the cycle time? How?

How can we forecast prices? What forecasting tools can we use or do we
need?

Should there be an agreement established for this item? If so, what is the
appropriate length?

This checklist should be used as a guideline and does not necessarily
contain all relevant considerations for identifying "Best Practices".

Lessons learned / Opportunities for Improvement. Throughout the
implementation of this plan it is important to always document any lessons
learned or opportunities for improvement that are identified.

Summary. A survey taken recently of major corporation executives
revealed that 68% believed that Purchasing made its biggest contribution in
cost control, 39% in control of supplier quality, and 28% in development of
overall supply strategies. But forty-eight percent (48%) also felt that there
was a lack of comprehensive supply strategies developed by Purchasing. If you
are to be recognized as doing different things, then you must have a strategy
or a Managed Acquisition Procurement Plan to make it happen.